Former YBR head Tim Brown has become the latest industry representative to warn that hazy guidelines around responsible lending will cause ongoing issues, predicting that the major banks will soon take action and demand clearer standards.
During a panel discussion at The REAL Future of Advice conference in Vietnam this week, former YBR head Tim Brown, chief executive of Ezifin Financial Services, highlighted the issues being caused by confusion over responsible lending.
Mr Brown noted that the financial services regulator had recently taken Westpac to court over allegations it breached lending laws between 2011 and 2015 by using the Household Expenditure Measure (HEM) to estimate potential borrowers’ living expenses.
While Westpac had admitted to breaches and agreed to pay $35 million, the judge presiding over the case, Justice Nye Perram, questioned whether the Westpac case constituted a breach of the NCCP (reportedly stating that “there is no fact before [him] that any unsuitable loans were made”).
Justice Perram eventually ruled in favour of Westpac, judging that a lender “may do what it wants in the assessment process”. However, the corporate regulator revealed earlier this month that it would contest the Federal Court’s decision in an appeal.
Mr Brown stated that the Westpac case had created a “minefield” where lenders “can’t get clarification from ASIC” over standards for evaluating consumers’ eligibility for mortgages.
“I think the problem with this whole expense discussion is that a lot of the assessors put their own personal assessment on what someone else spends money on, which is where the problem lies,” Mr Brown said.
“It needs to be much more factual.”
He continued: “I think it is going to be a problem for at least another six months until some of the banks get together with ASIC and say: ‘Look, we need to get some clear guidelines around this.’ Because [ASIC is] basically saying HEM isn’t acceptable anymore.”
Mr Brown noted that when he first started lending, brokers would sit with clients, go through their expenses and make sure they had enough capacity to meet any future increases and interest rates by using HEM and allowing up to 2.5 per cent above the current rate.
Reflecting on his own experience of buying his first property, Mr Brown said he did not think his expenses would have passed current standards.
“But within the first six months of buying a home (and we know this factually and we’ve recently seen ASIC having these discussions), most people will reduce their discretionary spending by 20 per cent,” Mr Brown said.
“Most assessors in the past could make that decision without any concern. But in the current environment, they are afraid to make those decisions because there’s a way around it and ASIC might review that,” he told delegates.
“And this comes back to this personal assessment of someone else’s opinion on what someone should have a discretionary not a discretion.
“Because ASIC just goes: ‘Well, you know, best endeavors... Whatever you think is reasonable.’ And then they’ll charge you if they don’t think it’s reasonable.”
‘We want some direction’
The broking industry veteran therefore called for urgent clarity from ASIC, stating: “The banks are sick of this game that they’re playing with ASIC at the moment.
“Eventually, the four of them will get together and say: ‘Look, you need to give us some clear guidelines.’
“At the moment, I think the industry bodies are trying to come together with something they can take to ASIC both from a vendor’s perspective and also from an MFAA (Mortgage & Finance Association of Australia) and FBAA (Finance Brokers Association of Australia) perspective.”
Mr Brown noted that every time he had been on a panel, he had been asked about the Westpac decision.
“There’s obviously a real concern amongst the number of people at the moment,” he said.
“We want some direction.”
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